In the Below Diagram Assume That the Aggregate Demand Curve

question 19

Essay

In the below diagram assume that the aggregate demand curve shifts from AD1 in year 1 to AD2 in year 2, only to fall back to AD1 in year 3. (a) Explain what will happen to the equilibrium price level and the equilibrium level of real GDP from year 1 to year 2.(b) Locate the new position in year 3 on the assumption that prices and wages are completely flexible downward.Label this position, Pb and GDPb for the price level and real GDP respectively.(c) Locate the new position in year 3 on the assumption that prices and wages are completely inflexible downward.Label this position, Pc and GDPc for the price level and real GDP respectively.

---

Definitions:

Market Value at Split-Off Method

A method used to allocate joint costs based on the market value of products at the point of separation in a production process.

Joint Costs

Joint costs are costs incurred during the process of producing two or more products simultaneously, where such costs cannot be easily attributed to each product individually.

Cut Boards

The processed lumber cut into specific lengths or sizes, typically for use in construction or carpentry.

Physical Units Method

An approach in accounting used to allocate joint costs based on the proportional physical quantities of the output produced at a split-off point.